Forex Weekly Outlook March 4-8

The US dollar and the Japanese yen surged against all the other currencies in very volatile week. The deadlock in the Italian elections brought back the debt crisis. Rate decisions in Australia, Canada, Japan, the UK and the euro-zone, as well as a buildup of top-tier US figures leading up to the all-important Non-Farm payrolls are the highlights of a very busy week..

The Italian elections resulted in an “ungovernable” Senate. The outcome not only hurt the euro, but also sent the yen higher. Eventually, the appointment of a dovish BOJ governor curbed some of the yen’s gains. The euro wasn’t able to recover as data remained depressing, and also the pound was pounded by bad figures. In the US, pending home sales surprised with a 4.5% leap in January, and new home sales improved to an annualized number of 437,000 units. All in all, great figures for the US housing sector. Another progress was noted in the US job market with an impressive decline of 22,000 in the number of new unemployment claims registered last week, indicating the job market is picking up. However, the employment component of the manufacturing PMI was lower (in an overall good report) and the GDP growth in Q4 was minimal: only 0.1% after the first revision. Where is the US economy heading? We’ll get some better answers this week. Let’s Start

Australian rate decision: Tuesday, 3:30. The Reserve Bank of Australia (RBA) decided to maintain the cash rate unchanged at 3%, in line with market predictions. In 2012, the central bank cut rate by total of 1.25 percentage points. RBA governor Glenn Stevens remarked that financial markets are in constant improvement as well as Australia’s domestic economy boosted by increased consumer spending. No change in rate s is expected, yet the RBA doesn’t always act as expected. AUD/USD trades in downtrend channel

US ISM Non-Manufacturing PMI: Tuesday, 15:00. The Institute for Supply Management reported that the PMI for the non-manufacturing index dropped to 55.2 in January, following a revised reading of 55.7 in December. The reading was in line with predictions and is still in positive ground, indicating expansion. A small decline to 55.0 is forecast this time. Note that this is a key hint for the Non-Farm Payrolls. The employment component should be watched closely.

Australian GDP: Wednesday, 0:30. Australia’s economy expanded modestly by 0.5% in the third quarter, due to a boost in business investment. However, lower export incomes and government cuts may suggest hardships in the fourth quarter. Economists expected a higher expansion rate of 0.6%. An expansion of 0.6% is expected now.

US ADP Non-Farm Employment Change: Wednesday, 13:15. The US private sector employment gained 192,000 jobs in January, according to the January ADP National Employment Report. The reading followed an increase of 185,000 jobs in December. A gain of 168,000 is forecast. Despite changes in the formula, the number does not always correspond to the private sector part in the Non-Farm Payrolls.

Canadian rate decision: Wednesday, 14:00. The Bank of Canada kept its overnight interest rate at 1% in its last monetary meeting. The board members altered their estimates regarding a possible rate hike, saying it will be further away than previously thought, due to excess capacity, soft inflation and stabilizing household debt. But gradual reduction in monetary stimulus is planned until the end of 2014. The rates are expected to remain unchanged and the tone of the statement will be watched.

Japan rate decision: Thursday. Japan’s central bank increased its purchase program by 10 trillion yen ($128 billion) to 30 trillion yen in its last monetary policy meeting and agreed on a 1.0% inflation goal. The recent changes suggest the BOJ has succumbed to the strong political pressures inflicted in recent months. No change is expected in policy and the stage will probably be left to the new governor, Haruhiko Kuroda, which is considered dovish.

UK rate decision: Thursday, 12:00. The Bank of England voted to maintain interest rate at 0.5% as well as reinvest government bond holdings that matured in March, promising to further increase stimulus if required in order to boost the UK recovery. However, the meeting minutes revealed that there is growing support for more QE. 3 out of 9 members, including governor Mervyn King, voted for more monetary stimulus. Will the QE program be expanded now? This could hurt the pound.

Eurozone rate decision: Thursday, 12:45, press conference at 13:30. The ECB isn’t likely to move on the rates in the March meeting. Draghi’s warning on the exchange rate of the euro already had a significant effect, and the elections in his home country already did more than a rate cut could have done to weaken the euro. The focus is expected to remain on the press conference. Draghi is likely to try and balance between the current economic situation which is quite depressing, and the optimism for growth in H2 2013, coming now from higher business confidence, mostly in Germany. An ongoing political turmoil in Italy could bring the OMT back into the limelight. The drop in inflation to 1.8% and the rise in unemployment to 11.9% could lead Draghi to hint about a rate cut in April. This could come in a form of saying that the decision was not unanimous, and that some members wanted a cut.

US Trade Balance: Thursday.13:30. US trade balance deficit narrowed in December to $38.5 billion, amid a rise in exports and lower imports of oil indicating the US economy, performed better in the fourth quarter than initially estimated which will increase the GDP reading. A wider deficit of $42.8 billion is anticipated.

US Unemployment Claims: Thursday.13:30. The number of Americans seeking initial unemployment benefits declined 22,000 last week to a seasonally adjusted 344,000, indicating that the job market may be picking up. The four-week average of applications was reduced to 355,000 suggesting stronger hiring, offering hope for a real recovery in the US economy. A small rise to 356,000 is forecast.

Canadian employment data: Friday, 13:30. Canada’s job market contracted unexpectedly 21,900 jobs in January; however a drop in the number of people seeking work lowered the unemployment rate to a four-year low of 7.0%. The job contraction missed market expectations for a 4,500 job increase. The manufacturing major sector was affected most by this decline. 7,800 new positions are expected this time with a 0.1% increase in unemployment.

US Non-Farm Employment Change: Friday, 13:30. U.S. non-farm job growth ticked up in January, rising 157,000, following a reading of 155,000 in December. Economists expected a higher reading of 161,000. Job growth in 2012 averaged 153,000 a month, nearly the same as in the previous year, not enough to significantly reduce unemployment. Economists believe employment gains of 250,000 a month are required to make the desired change in the US job market. U.S. non-farm job growth is expected to add 158,000 positions this time, yet the actual figure could be lower.

US Unemployment Rate: Friday, 13:30. Despite the moderate job growth in January and in the two previous months, the unemployment rate, edged up 0.1% to 7.9%. Average hourly earnings rose four cents in January, and are believed to go up further in the coming months. All in all, the US economy is on a moderate recovery trend.No change is expected.

*All times are GMT.

That’s it for the major events this week. Stay tuned for coverage on specific currencies

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